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FSA "did not establish misconduct" from alleged CEO compliance failures, tribunal says

The financial services regulator "did not establish its case" that the former chief executive of a large investment bank had committed misconduct through his alleged failure to adequately supervise compliance issues.26 Apr 2012

The Upper Tribunal (Tax and Chancery Chamber) overturned a £100,000 fine imposed on John Pottage, the former head of UBS' UK wealth management division, by the Financial Services Authority (FSA). Pottage was fined for failing to take "reasonable steps to ensure that the business of the firm for which he is responsible in his controlled function complies with the relevant requirements and standards of the regulatory system", under the FSA Statements of Practice for Approved Persons (APER).

Banking law expert Tim Dolan of Pinsent Masons, the law firm behind Out-Law.com, said that the case was a particularly important one as it was the first time that the regulator had publicly tried to penalise a senior manager for inadequate supervision over others rather than for actual individual wrongdoing.

In its ruling (71-page / 411KB PDF), the tribunal said that the steps Pottage took before July 2007 to deal with operational and compliance issues at the Swiss-headquartered financial services company were appropriate, given the nature of his role. Pottage held the controlled "chief executive" and "apportionment and oversight" functions at a time where four employees were able to carry out unauthorised transactions with customers' money. UBS was fined £8 million by the FSA for the "systems and controls" failures that enabled this to happen.

The FSA confirmed that it was "discontinuing its action" against Pottage in a short statement on its website.

"Going forward, the FSA will be limited in its ability to assert that individuals in senior management are responsible for all failings at their firms," banking law expert Dolan said. "The FSA will have to ensure, prior to taking enforcement action, that there is a line of responsibility between the senior management and the area in which the failing occurred."

In its initial ruling, the FSA said that Pottage failed to take "reasonable steps" to ensure that UBS complied with its regulatory requirements or to fix "serious flaws" in its governance and risk management frameworks. The regulator said that he should have implemented a systematic overhaul of the bank's compliance procedures "sooner than he did" following "serious and widespread deficiencies in systems and controls" during his time as chief executive.

"He should have appreciated the need to focus on addressing and resolving the serious flaws... by way of the Systematic Overhaul," the regulator said in its ruling. "However, the Applicant did not initiate the Systematic Overhaul to examine the wider implications of these issues either as they arose or in response to increasing levels of concern being voiced by the Authority's supervision team until the review at the end of July 2007."

Although the Tribunal accepted there had been "serious flaws" in the firms' compliance and risk management systems, it agreed with Pottage that the failures had "been investigated and were being remedied in accordance with a detailed plan".

"The inescapable fact is that the problems... were arising because of non-compliance at ground level," it said in its ruling. "An approved person will only be in breach of a Statement of Principle where he is personally culpable, and not simply because a regulatory failure has occurred in an area of business for which his is responsible. It is not alleged that Mr Pottage's conduct was deliberate. Nor it is alleged that, simply because matters went wrong while Mr Pottage held office as CEO, there had been a failure to take 'reasonable care'."

Pottage remains an employee with UBS, which appeared as an interested party at the tribunal. "John Pottage and UBS take note of the decision of the Upper Tribunal. We are pleased with the outcome and that this matter is now closed," the bank said in a short statement.

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